There are two basic strategies for raising cash that can be used in connection with resolving your debt situation:
Selling some of your assets
Borrowing monies from family and friends
Raising cash by selling some of your assets
Some, but not all, Canadians facing significant debt problems are in a position to substantially improve their debt situation through the sale of one or more of their existing assets to help pay down your debt. The monies raised by selling these assets is then available for whatever strategy a person uses to eliminate their debt. For some people who own a home, townhouse, condominium, or trailer this might mean either downsizing or renting. If you own a house, townhouse, condominium then how much cash could you raise if you were to sell your residence?
For some Canadians experiencing debt problems, selling their principal residence offers a second important advantage—the potential to put the equity in the property beyond the reach of creditors. If, at some future date you are unable to make your payments on your unsecured consumer debt—credit cards, and utilities such as internet, cable television and telephone service—then the odds of you being sued might be substantially reduced if you do not own any real property. There is at least one Canadian chartered bank that will sue consumers for unpaid accounts for as little as $4,000 provided the consumer owns real property in their own name.
The bottom line is that it is relatively easy for your creditors to recover monies from you if you own real property in your own name. All your creditor has to do is to sue you, get a judgment against you, and then obtain a lien against any real property that you own. It is often much more difficult for creditors to recover monies from consumers who do not own real property in their own name.
Therefore, if you anticipate that at some point in the next six to 24 months that you are going to default on your unsecured consumer debt, ideally, you should consider the advantages and disadvantages that would arise if you were to sell your real property and then rent for a period of time. Later in this article we are going to learn more about making a consumer proposal as an option for dealing with your debt situation. If you own real property and you are experiencing debt problems then you are also going to want to consider the merits of making a consumer proposal to your creditors.
A person’s principal residence is not the only asset which could potentially be sold to raise cash in order to address a person’s debt situation. The following is a list of assets which some Canadians might be able to sell to raise cash:
All terrain vehicle
Collection (coin, stamp, gun etcetera)
It is common for some Canadians to cash in part or all of their RRSPs to raise cash for use in paying down debt. A person should be very careful when doing so. Firstly, if you cash in an RRSP then you will have to pay income tax on the income generated by cashing in your RRSP. Secondly, RRSPs are exempt property. If a Canadian declares personal bankruptcy then the bankrupt can keep their RRSPs except for any contributions made to an RRSP within 12 months prior to their bankruptcy.
Borrowing monies from family and friends
Bill collectors are trained to encourage consumers with unpaid accounts to borrow monies from family and friends in order to pay their outstanding account. For many people reading this article they would be delighted if they could place a call to a family member, borrow the monies owing to one or more creditors, and put their debt mess behind them.
Unfortunately, borrowing monies from family or friends to pay off a debt might not be a good idea. Borrowing money from a friend can result in the loss of a great friendship. Borrowing money from family members might place some strains on family relationships. If your household is consistently spending more each month than it is bringing in then borrowing monies from family and friends is simply going to delay the inevitable. Finally, in certain circumstances a consumer might actually be better of making a consumer proposal, simply not paying the outstanding account, or potentially attempting to make a lump sum settlement at some future date for less than 40 percent of the current outstanding balance.
There are two specific scenarios where it might make sense for a person to borrow monies from family and friends.
To finance a lump sum payout on a consumer proposal:
Later in this article we are going to learn more about alternatives to bankruptcy, one of which is making a consumer proposal to your creditors. In a nutshell, if your creditors accept your consumer proposal you will repay an amount equal to about 35 percent of what you currently owe to your unsecured creditors. Under federal law, the maximum repayment period is five years or sixty monthly installment payments. However, there is nothing preventing a person from making a lump sum payout in connection with their indebtedness under a consumer proposal.
If you owe a substantial amount of money to your unsecured creditors and your family is prepared to lend you some monies then it might make sense for you to do a consumer proposal and then do a lump sum payout using monies provided by your family or friends to fund the lump sum payout.
Where the debtor owes a relatively small amount of money:
It might make sense to borrow monies to pay a debt where the amount of money owing is relatively small. If you owe monies to your creditors and you default in paying these monies then it will have a negative impact on your credit score. This will affect not only your ability to borrow money but also how expensive it will be for you to borrow money over the next six years. If you owe a relatively small amount of money to your creditors then it might make sense for you to borrow monies from family or friends so that you protect your credit score.
It is possible to raise monies to pay off a debt by obtaining a consolidation loan from a lender. I have made an arbitrary decision to include consolidation loans under Alternatives to Bankruptcy and not this section for a number of reasons. If you borrow monies from a lender it will show up on your credit report. Furthermore, the lender expects to be repaid. If you borrow monies from friends or family then it is possible it is a zero interest loan, a “pay us back when you can loan” or even a “forgivable loan”. If you borrow monies from your parents they might choose to deduct it from what you might otherwise receive in an inheritance.